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Don’t Get Burned by Your Third Parties

Sales and marketing professionals often rely heavily on a variety of third parties to help them meet their forecasted revenue targets and other objectives. These independent sales representatives, distributors, resellers and consultants are often a critical and indispensable cog in the indirect sales channels that exist in many industries, particularly with respect to international sales markets.

Just as real, however, is the inescapable fact that these commercial intermediaries present inherent risks to your organization. The risks come in a variety of forms: legal, regulatory, financial and reputational; and they could threaten to undermine your strategy to penetrate new markets, grow sales and meet your objectives. The good news is there are steps that can and should be taken to help mitigate those risks.

Two areas of risk that arise through the use of third-party intermediaries in international transactions are violations of anti-bribery laws, including the U.S. Foreign Corrupt Practices Act (FCPA), and violations of U.S. export controls laws. These are two areas that have been and will likely continue to be a focus of U.S. law enforcement agencies and regulators, so they deserve your attention, as well.

The FCPA and the anti-bribery laws of many other nations prohibit the making of corrupt payments to foreign officials to obtain or retain business. The laws provide for civil and criminal penalties against both businesses and individuals for violations, including the payment of heavy fines and jail time.

The FCPA prohibits bribes made through third parties. A company can be held liable for bribes paid by a third party when it makes a payment to a third party and has knowledge that the payment or a portion of the payment will go to a foreign official. It is important to note that knowledge includes both actual knowledge as well as being aware of a high probability of the existence of the facts. Thus, regulators can hold those liable who seek to avoid actual knowledge of violations by putting their “head in the sand.”

With regard to export controls laws, one prime area of concern is the diversion of U.S. products and technology by a foreign party in a transaction to a prohibited foreign person, a prohibited destination country or for a prohibited end use (such as nuclear, chemical or biological weapons proliferation or the missile technology to deploy them). Here, U.S. government regulators focus on certain foreign parties, such as distributors and other intermediaries, who are involved in an export transaction and pose risks for illegal diversion or shipments. Much like the FCPA, there is a knowledge standard in export transactions, with exporters expected to “know your customer,” and there are also substantial civil and criminal penalties for violations of export controls laws.

To help avoid running into trouble through your use of third parties, due diligence must be conducted on all third party commercial intermediaries that you are considering engaging. Sales and marketing professionals, with their roles managing the relationships and their access to information, are uniquely positioned to assist in this process. This is particularly important because companies can be considered to have knowledge of the activities of their agents that they could have obtained by exercising reasonable due diligence.

So, what are some of the steps that can be taken as part of a due diligence review of a third party? Some steps include obtaining a complete understanding of the organizational structure and business registrations of the intermediary, as well as identification of its ownership and key employees and any third parties that will engage in activities on behalf of your company, disclosure of any government employment of any owner or employees or their family members, checking business and financial references, and checking all relevant names against the various lists of prohibited entities and individuals maintained by U.S. export regulators, including the Departments of State, Commerce and Treasury.

The purpose of the diligence is to identify any “red flags” that could indicate a greater degree of risk of a legal violation. Some examples of red flags from an FCPA perspective include excessive commissions, unreasonably large discounts to distributors, agreements with consultants that do not clearly specify services to be provided, a third party that is closely related to a foreign government official, or if the third party is a shell company. Some red flags that indicate export controls risks include reluctance to offer information about the end-use of the item, orders for products that possess capabilities that do not fit the buyer's line of business, or a buyer that is evasive and especially unclear about whether the purchased product is for domestic use, for export, or for reexport to another destination.

Additional compliance safeguards may also be utilized to help reduce risk. These include detailed contracts that clearly specify the services to be provided, and that contain anti-bribery and export controls compliance provisions, recordkeeping requirements, and audit rights. Training is also important and your third-party intermediaries should ideally be trained just as your company employees would be. Lastly, your third parties should be required to certify their compliance with relevant laws and regulations. Sales and marketing personnel can be particularly helpful in assisting their compliance colleagues with these activities, as their relationships with the third parties can help facilitate the contract process and make clear the company’s expectations with regard to compliance and training.

So, while the use of third parties in international business transactions are inherently risky, there are a variety of measures that can be undertaken to minimize the risks and sales and marketing professionals can play an important role in that process.

Eric J. Rudolph is President of Rudolph Export Consulting, Inc. He can be reached at eric@rudolphexport.com.